Definition and Example of Reflation
Reflation is an economic term referring to stimulating measures taken to lessen or stop the effects of deflation. Reflationary measures can consist of fiscal policy (lowering taxes) or monetary policy (changing money supply or lowering interest rates).
For example, the Federal Reserve may choose to lower interest rates to jump start a weak economy common in deflationary periods.
Reflation Investment Strategies
Bond funds can be good, especially in comparison to stock funds, in reflationary periods because bond prices rise as interest rates are falling. During deflation, asset prices are falling so you'll generally want to avoid assets such as cash, gold, real estate and stocks.
Tip and Caution
Trying to navigate market and economic conditions with investment strategies is a form of market timing that carries significant risk of losing value in an investment account. For most investors, building a diversified portfolio of mutual funds is the best strategy for all market and economic environments.
See Also: Inflation, Hyperinflation, Stagflation, and Deflation.
Disclaimer:
The information on this site is provided for discussion purposes only, and should not be misconstrued as investment advice. Under no circumstances does this information represent a recommendation to buy or sell securities.
